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Making Pensions Part of the Plan: De-risking Accelerates Enterprise Transformation

May 01, 2021


Alex Hyten

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Rohit Mathur

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Alex Sakowitz

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Making Pensions Part of the Plan

What a difference a year makes. At the beginning of 2020, we wrote that pension funds in the U.S., the U.K., and Canada were at the highest funded levels in 10 years. As we continue to reflect on the past year, we are reminded that such favorable market conditions do not often last. The COVID-19 pandemic has impacted   PDF Opens in a new window our families and communities, changing the way we work and interact with each other. It has also created significant economic volatility for global markets and pension plans.

As we noted in our 2020 Year in Review and 2021 Market Outlook, it isn’t all bad news for plan sponsors. Well-positioned plans that stayed the course took advantage of improving market conditions. The importance of being prepared to de-risk will continue to be a theme in 2021 as we again expect significant levels of buy-ins and buy-outs in the U.S., the U.K., and other countries. Amidst ongoing market volatility, it is now more critical than ever for plans to consider their de-risking plans not just on a standalone basis, but as part of broader corporate transformations.

Enterprise transformations have increased in popularity over the past several years and will continue to gain momentum in C-suites in 2021. McKinsey notes, “In industry after industry, scenarios that once appeared improbable are becoming all too real, prompting boards and CEOs of…businesses to embrace the T-word: transformation.”1 Deloitte noted, “In a world of unprecedented disruption and market turbulence, transformation today revolves around the need to generate new value—to unlock new opportunities, to drive new growth, to deliver new efficiencies.”2 Both consultants encourage companies to transform big, rather than incrementally.

Whether focusing on growth, cost cutting, or technology, global transformations are changing the way executives manage their organizations. Seventy percent of global CEOs planned organic growth activities in 2020 and 77% planned to focus on operational efficiencies.3 Additionally, 83% of companies are currently planning to accelerate digital transformation.4 However, a company’s legacy pension plan may feel like an increasingly undue burden to management and shareholders as these transformations gain steam. It may prevent them from focusing on the execution of new corporate strategies and detract from the creation of shareholder value.

Rightsizing the amount of pension risk on a balance sheet can be instrumental to a broad, transformative strategy by reducing the distraction of unnecessary pension noise. Decreasing pension exposure is particularly important in times of market volatility, like today, as COVID-19 and related economic reform measures continue to impact global markets. We believe that many companies that thought long term and de-risked ahead of the storm fared better than those who did not.

The benefits of incorporating pension de-risking into large transformations start with helping to secure the pensions and financial wellness of employees and retirees, but can also:

  • Decrease or eliminate future pension contributions and, as a result, increase cash flow to spend on research and development or mergers and acquisitions
  • Enable a focus on restructuring initiatives
  • Improve stock market returns when compared with pension-heavy peers

We examine each of these benefits in this article and will continue to do so in articles that follow.


Research and Development & Mergers and Acquisitions

Imagine a budget free of annual pension contributions and an earnings season devoid of pension volatility. Consider the innovation and M&A opportunities that could arise from the improvement in free cash flow. While this future may sound aspirational if you currently have a material pension benefit obligation, it shouldn’t be viewed as an insurmountable goal. Pension de-risking is a tangible step that can be taken to drive transformational change.


Case Study – Bristol Myers Squibb

We believe Bristol Myers Squibb (BMS) transformed itself from a traditional pharmaceutical company into a diversified yet nimble bio-pharma innovator over the last few years. In our opinion, management decisions over the past decade seem to have been made with this strategic vision in mind. This includes multiple pension de-risking moves that began in 2009 and have since become part and parcel of the company’s broader enterprise transformation.

BMS began its de-risking journey by freezing its U.S. plan in 2009. It announced five years later in September 2014 the buy-out of $1.4 billion in U.S. pension obligations for approximately 8,000 retirees and their beneficiaries. The plan was in a strong financial position and the de-risking transaction required no cash contribution, leading the company to note in a press release, “The transaction reduces risk in the Plan and better manages the ongoing variations in cost associated with its maintenance while entrusting current retirees and their beneficiaries’ pensions to a financial institution with expertise in the long-term management of retirement benefits.”5 Within six months of the pension risk transfer, BMS acquired Flexus Biosciences for $1.25 billion and entered into a $339 million partnership with Rigel Pharmaceuticals. The collective moves enhanced BMS’s portfolio of cancer immunotherapies while bolstering its innovation pipeline and R&D capabilities.

BMS continued its transformative path in December 2018 with the largest full wind-up of a pension plan to date. The pension buy-out transferred $3.8 billion in U.S. pension liabilities to an insurer that, in turn, guaranteed a group annuity contract to any plan participant not paid with a lump sum. Unlike the buy-out in 2014, the 2018 de-risking transaction included a combination of retirees, active employees, and prior employees whose income payments had not yet commenced.

While BMS was transforming its U.S. pension obligations by fully insuring its plan and better meeting the retirement needs of a more modern and mobile workforce, it was also continuing to transform its business model. In January 2019, just days following the plan buy-out announcement, the company disclosed plans to acquire Celgene for $74 billion. The combined company created “a leading focused specialty biopharma company well positioned to address the needs of patients” with plans to “operate with global reach and scale, maintaining the speed and agility that is core to each company’s strategic approach.”6 Management continued to put additional cash to work in October 2020 when it acquired MyoKardia for $13 billion.

Together with the plan termination, the Celgene and MyoKardia acquisitions demonstrated BMS’s commitment to focusing on sustained growth, innovation, R&D, and M&A. We believe that by transforming its pension plan in lockstep with transforming its business model, BMS was able to maintain a holistic focus on its growth potential, balance sheet, and value provided to shareholders.


Figure 1: Timeline of Bristol Myers Squibb de-risking and transformation activity



Restructuring Initiatives

When pairing pension de-risking with broader corporate restructuring initiatives, management can emerge post-restructuring with a stronger balance sheet, greater ability to focus on core operations, and less noise around how their pension plans were impacting the quality of their results.


Case Study – Royal Philips

In 2014, Royal Philips announced it was preparing to transform itself into two distinct entities: A high-margin health care and consumer company and a lower-margin lighting products unit. CEO Frans Van Houten noted: “Great companies need to reinvent themselves, we can do that, we can stay relevant, we can grow, and we can stay successful. It takes courage but it’s a path we’ve been preparing for carefully.”7 The restructuring announcement by the Dutch multi-national in 2014 preceded the eventual spin-off and initial public offering of the lighting unit in 2016. The divestiture of Philips Lighting N.V., later re-named Signify N.V., from the parent company allowed Philips to retain focus on its more profitable health care and consumer markets.

At the same time this re-structuring occurred, Philips engaged in a strategic pension de-risking effort across both the U.K. and the U.S. that commenced in 2013 and concluded in 2015. In the U.K., Philips executed a series of three buy-ins in the run-up to a full buy-out of its 30,000-participant pension scheme. The initial implementation of the strategy was a £484 million buy-in in October 2013. The company then closed back-to-back buy-ins including a £300 million transaction in June 2014 and a £310 million transaction in September 2014. That same month, Philips disclosed its decision to begin restructuring.

One year later, in November 2015, Philips de-risked £2.4 billion in U.K. pension obligations. This full buy-out included both current employees and retirees, resulting in a complete wind-up of the U.K. pension fund. Concurrently, Philips’ North American subsidiary Philips Electronics North America Corp. executed its own pension risk transfer deal. In October 2015, the New York-based unit announced the transfer of $1.1 billion in pension obligations covering 17,000 retirees, beneficiaries, and terminated vested participants to multiple insurers. Philips also committed to contributing approximately $125 million to support the transaction. As part of its broader commitment to restructuring, the transaction focused on plan participants who worked for divisions of the company no longer included in its current business structure. Although the details of a Canadian pension risk transfer deal are undisclosed, we believe that the U.S. and U.K. transactions occurred alongside one or more Canadian transactions.

Philips announced the continuation of its de-risking journey, disclosing in February 2021 the transfer of approximately $1.2 billion in U.S. pension liabilities to two insurers. The transaction consisted of 11,000 retirees, beneficiaries, and deferred participants in its North American plan.8

Philips’ corporate restructuring plan was a large-scale, multi-year transformation—and so was its pension de-risking plan. Treating the pension plans as an afterthought could have resulted in one of the post-split companies bearing outsized pension liabilities. By incorporating the de-risking of pension obligations into its strategy, we believe management was able to make bold, transformational changes that provided material benefit to shareholders. Philips has set a standard for other global companies to follow.


Figure 2: Timeline of Philips de-risking and transformation activity



Stock Market Returns

Including de-risking as a part of corporate transformation yields many benefits, but perhaps the most tangible value is demonstrated by stock performance. While multiple factors affect stock prices, we find that investors often applaud, and are willing to pay a premium for, pension-light companies.

We observe that pension-light companies tend to outperform their pension-heavy peers, while companies with no pensions perform the best. This is the case during times of severe market volatility like we witnessed in the first half of 2020 as well as during times of bullish market momentum like we witnessed in the second half of 2020. Over the full year, equal-weighted total returns for the S&P 500 were ~16%, while equal-weighted total returns for companies with no pensions were ~33%. Pension-light companies rose ~15%, while their pension-heavy peers rose only ~2%. 9


Figure 3: Pension-heavy companies underperformed those with small or no pension obligations throughout 2020


Source: Capital IQ. Adjusted stock price returns for the S&P 500 from 12/31/2019 through 12/31/2020.


As we also noted last year, companies with heavy pension exposure are hindered by the allocation of cash to pension contributions rather than to grow their core business. Additionally, they are challenged by exposure to shifting interest rates and mortality assumptions, Pension Benefit Guaranty Corporation (PBGC) premiums, and duration mismatches between plan assets and pension liabilities. Meanwhile, pension-light companies can avoid pension volatility and better focus on their core businesses and other transformational initiatives to bolster shareholder value.


De-risking Helps Companies Accomplish Bold Transformations

As evidenced by the previous examples, de-risking pension obligations can enable companies to accelerate transformations and other long-term strategic objectives. It can further generate shareholder value by reducing risk and volatility around the balance sheet and improving free cash flow.

Whether launching a global vs. targeted de-risking effort, focusing on retirees only vs. a broader participant subset, or engaging in a full buy-out vs. a partial buy-out or buy-in, different approaches can be used. But the result will be the same: Freed from the weight of their pension obligations, corporations are able to make bold, transformational changes and enjoy the many benefits of a lower-risk future.


Want to make your pension part of your enterprise transformation plans? Please contact Glenn O’Brien opens in a new window.





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